Gold Price vs. Hedge Fund Activity - Act II

This is to provide a bit more lengthier view of the gold market action vis-a-vis the hedge fund activity going back to the beginning of 2011. It includes the rally to the record high price ( these are weekly closing prices only and thus do not reflect any intra-week spikes but only where price closed that week).

There is one thing I would really like to point out on this chart and that is the section where the words "Gold sinks to $1523 but recovers" begins. Look at the SHARP INCREASE in the number of fund long positions as opposed to the amount of short covering. Can you see it? Massive NEW BUYING in opposition to modest short covering. The number of new longs ramps up by 75,000 positions compared to a reduction of about 11,000 existing short positions. The ratio is nearly 7:1.

Then move to the right on the chart when the words, "Price hits $1525 again and then rallies to near $1800 as funds pile back on the long side and cover shorts". There we have an increase of 101,000 new longs compared to about 36,000 short positions covered. The ratio is less than 3:1 but still strongly favors new buying compared to short covering. Traders were getting excited about the possibility of gold coming back up and taking out $1800 once again and going on to make new highs but the number of skeptics was increasing.

The failure there turned the psychology around completely. Bulls bailed out in earnest and bears became aggressive. The number of longs that bailed out was about 86,000 while the number of new shorts went on to max out near 78,000. Clearly it was a huge change in sentiment that caused this.

What I would like to emphasize is the fact that during times when the bullish psychology was still at work in gold, rallies back off of support levels that were tested and held were led by a huge number of new long positions in comparison to the number of short positions being covered. That was reflective of the bullish sentiment that was still intact even after the big drops in price. Traders were convinced that the bull market was going to resume and did not want to miss it, after it had been ongoing for a decade.

When the price failed on the third test of $1800 the sentiment began to shift and even the most resolute of bulls began to waver. The final blow came when $1530-$1525 gave way and down she went.

This time around we are watching gold rally but the move higher is being led by a greater number of shorts compared to the number of fresh new long positions. That is what has me concerned. A careful analysis shows that there is no longer the same resolute bullish sentiment that once existed prior to the breakdown at $1800 but especially after the failure at $1530-$1525.

That is why, even though we have had a nice move off the lows, we are still not seeing bulls getting aggressive. I am convinced that we will need to see at least a breach of $1425 and a change in the handle to stay at "14" before we will get some skeptics on the sidelines to come in. Gold needs to see a change in sentiment for a brand new bullish trend higher can be maintained.

Please bear in mind that I am talking about a strong new uptrend and the resumption of a bull market. Until $1530 gets recaptured, this is just a rally in a bear market. It is a nice rally, and is certainly a tradeable rally, but it is nonetheless a bear market rally.

There needs to be further developments, whether geopolitically but more importantly concerning the US Dollar to occur before we will once again see the strong NEW BUYING that has in the past been a hallmark of bullish moves higher than have some sticking power.

Again, that certain website and its plagiarizers over there - I am watching you.... You may use this chart and the accompanying notes but I expect full credit to be prominently noted.

Gold Price vs Hedge Fund Activity

It took a bit of doing but I have been able to create a chart of the price of gold overlaid against the activity of the big hedge funds based on the Commitment of Traders report.

I present it here for your reading convenience. The blue line is the number of OUTRIGHT LONG positions among this group of traders. The black line is the number of OUTRIGHT SHORT positions. The area chart ( in green) is based on the CLOSING PRICE of gold for the week ( please note that this is not a daily chart).

Notice the near perfect symmetry of the green area chart ( the gold price at the Comex) with the blue line. This is why I keep stating that the big speculators ( hedge funds) are the drivers of our modern markets. You can see the price of gold has tended to rise and fall with that blue line until early in 2013.

About that time, the number of short positions by the hedge funds because to increase as this category of traders became increasingly bearish. The wholesale long liquidation halted at that time as well. From that point forward, the blue line is relatively flat.

However the gold price continued to fall. Why was that? Answer - because the hedge funds began to play gold more from the short side as they ramped up the number of outright short positions to its largest point in over a decade. That selling took the price of gold down below $1200 at one point ( remember this is a weekly closing price).

In July of 2013 an enormous short covering rally took the price of gold up over $200 from off the low. Can you see the sharp fall in the BLACK LINE and the corresponding rise in the green area?

Then look at what happened - the price of gold began to fall again but this time around it was mainly due to hedge fund long liquidation ( see the sharp drop in the blue line). Shorts were covering into that long liquidation and that is why the black line moved lower along side of the gold price.

Then in November of last year, the hedge funds began aggressively shorting gold again ( the black line rises sharply)  with the result that the price dropped well over $150 into the end of the year.

Now look at what has happened this year... look at that black line and see it plummet. Look also at the blue line and see it jump. Hedge funds are both covering shorts aggressively while some in that same category are rebuilding longs. The result has been to push the gold price up nearly $200 once again.

Please note that this has everything to do with money flows ( money flowing into and out of gold) and nothing to do with price manipulation theories. When specs are buying, the price rises. It does not matter whether the buying is coming from short covering or from new buying - the price will rise.( The longevity of that price rise is however dependent on the nature of that buying - but that is a different topic ).

When specs are selling, the price will fall.

What you see reflected in these two lines, the black one and the blue one, is a visual graph of INVESTOR SENTIMENT towards gold. It really is that simple. Tell me what the sentiment is towards gold, and I will tell you what the price is going to do. Why do you think we spend so much time attempting to discern the shifts in sentiment and what is driving prices?

Notice I am using the words "INVESTOR SENTIMENT". By that I mean Western investment demand, not Asian physical buying. The latter merely bottoms the gold price; it does not drive it strongly higher. That is reserved for investment demand coming from the West.

Incidentally, this is what technical analysis and study of the charts does for us - it provides a glimpse into changing sentiment. Learn to read the charts, and you will learn to gauge sentiment. You do not need to waste your money and enrich others by paying for their high-priced newsletters and putting up with their wild predictions. In my mind, too many of these hucksters cannot make a living trading so they rely on you, their carbon-based, warm-blooded hosts,  to feed them and provide them with a stream of steady income. Save your money, force these human ticks to trade to earn their own living, and do your own analysis and your own thinking.

I can tell you one thing with absolute certainty - if the majority of these overpriced newsletter hustlers had to actually trade to produce an income, you would see a huge reduction in the number of wild prognostications, sensational claims, goofball theories ( backwardation claptrap always comes to my mind), and other assorted reasons for you to rush blindly into a market without having the foggiest idea of why you are putting YOUR HARD-EARNED WEALTH at risk based on the theory of someone else whom you do not know and who will still make money even if they are wrong. You, on the other hand, are the one who stands to lose. Remember that....